Harmless Warrant

What is Harmless Warrant?

If a bondholder decides to buy another bond from the same bond issuing company, then they have to surrender the existing bond to the issuer. This practice is known as a harmless warrant. In other words, harmless warrant meaning requires the bondholder to return the existing bond to the issuing company should they decide to invest in other Bonds that have similar features from the same issuer.

Suppose you purchase a bond worth $2,000 having a 10% of coupon rate. The bond expires on 31st December 2022. Now, according to the harmless warrant rule, you cannot request another bond featuring identical qualities from the same company. If you would like to do that, you need to return the first bond to the company that issued it.

Why Harmless Warrant is Issued?

You might be wondering why a harmless warrant is issued. Well, this is a safety measure that helps issuers maintain their debt levels. Investors need to pay special attention to the this clause issued by the bond issuing company before making a purchase. The main reason why the issuer creates a harmless warrant clause is to avoid debt. Commonly known as wedding warrant, this security is issued by the organization that sells bonds. As mentioned before, it is done to avoid excess debt. Basically, the bond issuing company issues a harmless warrant clause to control the debt amount.

If the company does not implement the wedding warrant, the investor can get power over the issuing company. Besides that, they will not want to miss out on an opportunity to make multiple calls and buy a number of bonds from the company. It is important to note that these terms do not keep the trader from buying other securities of different terms from the same company. This means the investor still has an option to buy as many bonds as they want from the same company as long as the terms and conditions of each bond are different. The other bond must have a different principal amount, expiry date, and other terms.

Is Harmless Warrant Favorable for the Issuer and Investor?

Usually, the traders want to buy the same bond over and over again. This is because they find the maturity terms, principle amount, and other conditions quite favorable. While it might be a lucrative opportunity for the investor, repeated purchase of the bonds is not good for the issuing company. They might have a limited number of similar bonds.

Secondly, the issuing company can’t take the risk of issuing the comparable bonds to the same holder. That is the reason why they implement the harmless warrant clause, making it mandatory for the bondholder to surrender their previous bond to get another one with the same qualities. The harmless warrant does not give the bondholder the right to own more than one comparable bond at the same time. They should either return the bond they had purchased from the company or look for bonds with different terms.